The role for small businesses in Amazon’s growing empire

Today, nothing helps small retail businesses reach audiences better than Amazon distribution - but that may not be the case forever. Here's why...

by Eytan Buchman

Updated: Mar 2, 2018 Published: Jul 24, 2017

In just 20 years, Amazon went from being a digital book store to taking over global e-commerce. As it expands, it is increasingly stretching beyond retail with no signs of slowing down.

Amazon’s corporate mission has evolved from its 2003 e-commerce foundation to “build a place where people can come to find and discover anything they might want to buy online” to today’s mission to “be Earth’s most customer-centric company”.

But that mission is not enough for its founder Jeff Bezos. Here’s why.

Amazon Web Services (AWS), ostensibly a break from Amazon’s core strategy, proved the company was ready to enter the business to business (B2B) space and proved a valuable opportunity existed.

Yet profitability isn’t the only incentive driving Amazon into the B2B space; to be a customer-centric company Amazon must provide the best possible service, which likely means owning as much of the supply chain as possible.

To this end, 10 years ago Amazon launched “fulfillment by Amazon”(FBA), which enabled third-party small business to sell their goods through Amazon, tapping into their user base, warehouses, rapid delivery, and sales platform. The strategy worked.

Today, close to 50% of Amazon’s sales came from these small businesses.

Small and medium-sized businesses are teetering on the edge on Amazon

The implications of Amazon’s third party marketplace are serious for UK small businesses.

Amazon boasts that it has created over 600,000 jobs for the small business sector, which couldn’t come sooner as a recent Boston Consulting Group (BCG) report revealed that small businesses are most likely to be hit hardest by Brexit. The steady infrastructure and incredible reach afforded by Amazon could be a saving grace for small businesses.

There’s bad news in here too though.

This lifeline fosters a small business dependency on Amazon’s sales and distribution capacity that can be shut down at any point. Tech giants have been known to cooperate with smaller companies until they cannibalise revenue and get turned off.

Take Meerkat, a live video platform that landed two million users on Twitter. When Twitter launched a competing app – Periscope – it turned off Meerkat’s access, leading to its demise 16 months later.

The good news for Amazon sellers

Amazon seems to be moving full steam ahead with its third-party ecosystem. Just last week, Amazon hosted its first summit in the US for over 1,000 sellers and the company continues to invest in infrastructure to assist global sellers with importing to Amazon distribution centers.

While generally parsimonious with statistics, Amazon recently bragged about the global nature of its sellers, revealing an 80% increase in FBA sales internationally in 2016 and a global seller base that expanded by 70% last year.

In other words, while UK sellers may benefit from great reach to local buyers, so do global sellers.

E-commerce sales in the United Kingdom grew by 160% in 2016, hitting £133bn – of which Amazon has an estimated 16% market share. As the market becomes more lucrative, Amazon is increasingly under pressure to maintain a user base of sellers to compete with other retail giants that are enabling third party sales.

The phenomenon of large vendors like Walmart, Best Buy, and Newegg launching third party marketplace sites is largely limited to the US (for now) but, given the market opportunity, it’s likely only a matter of time before the Tesco’s and Sainsbury’s of the UK replicate the strategy.

Why Amazon may need to turn off the sales tap for third party sellers

The best-selling fidget spinner on Amazon has over 3,000 reviews, with an average of 2.5 stars. Based on reviews, it’s a piece of junk. For the most customer-centric company in the world, it’s hard to believe that maintaining this level of satisfaction will cut it.

FBA sellers are increasingly subject to strict rules governing packaging, delivery and more. However, Amazon’s experience with cloud computing and warehousing has proved that when you want something done right, you do it yourself.

Within this context, Amazon’s recent big-ticket acquisition of US grocer Wholefoods can be taken in two ways:

For the optimistic e-commerce seller, it’s just another distribution channel to get to a wealthier demographic.

For the pessimist, its the latest in a series of attempts to bring more production in-house, enabling Amazon to control quality and distribution while leveraging economies of scale to offer good quality at better prices.

So, what’s a small business to do?

As in most industries, technology in logistics enables smalls businesses to cutout the middleman. As businesses are granted more and more access to information, they become decreasingly dependent on the gatekeepers originally designed to support them.

Today, nothing helps small and medium-sizes businesses reach audiences better than Amazon distribution – but that may not be the case forever.

The degree to which Amazon can successfully manage third-party vendors while retaining the “most customer-centric company in the world” label will dictate whether that remains the case.

To ensure your small business doesn’t get undercut or iced out, you don’t need to ditch Amazon (on the contrary, you need to stay there) but my advice is that it would be wise to diversify, maintaining the ability to sell and fulfill on multiple channels.

Few retailers would agree to being dependent on one supplier or one buyer – doing the same for either sales or logistics channels is no different.